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Richard J. Grant
There is an obvious reason why Republicans, despite holding a majority in the U.S. House of Representatives, keep appearing to lose their fiscal standoffs against the Democrats who control the White House and the Senate.
In both of the post-election fiscal fights, first over the “fiscal cliff” and then the “debt ceiling” standoff, standing fast would trigger consequences that most Americans would find undesirable. The party to flinch first would be the one that is less certain of its esteem in the eyes of the electorate.
On the fiscal cliff, Republicans accepted a compromise on tax rates in order to avoid an automatic increase in all income tax rates. Few doubted that such across-the-board tax-rate increases would further depress the economy, so Republicans gave the president his more-modest requested tax increases in the forlorn hope that the electorate would exhibit the Wisdom of Solomon in their judgment of the accord.
The debt ceiling is a problem for Republicans only when it is viewed in isolation from the events that make it important. When the U.S. government spends more than its revenues during any significant period, the shortfall would be financed by credit until the borrowings could be covered by a surplus. Over the years, cumulative federal budget deficits have exceeded surpluses by just over $16.4 trillion, which is the current total of the formal national debt.
Up until the U.S. entered World War I, Congress had to approve the issuance of Treasury debt. This kept congressional attention on the consequences of deficit spending, whether those deficits were planned or the result of historical accident. But to facilitate the extraordinary demands of war finance, Congress set a statutory debt limit up to which the Treasury could borrow as needed without further authorization.
The existence of the debt ceiling, and the periodic reluctance of some congressmen to raise it, is often portrayed as an unnecessary impediment to the proper execution of the Treasury’s duties. But the debt limit does not give Congress any more power than it had before. Those who wish to eliminate the debt limit must understand that its elimination would not give the Treasury the freedom to borrow at will. It would still be necessary for the Congress to approve all borrowing.
When, in the minds of the electorate, the congressional spending decision becomes separated from the financing decision, voters lose sight of the fact that the whole debt-limit issue arises due to deficit spending. It also tends to obscure the fact that as government spending grows relative to the size of the economy, eventually the economy tends to grow more slowly. As tax rates are raised, in an attempt to “pay for” the expenditures, it becomes increasingly difficult and more expensive in terms of lost production to raise each new dollar of tax revenue.
When seen for what it represents, our repeated confrontations with the debt ceiling should serve to remind us that the perceived benefits of government spending cannot ultimately be separated from their cost. But a statutory debt limit is a poor substitute for a constitutional balanced budget amendment. Painless lessons are ignored by those statists who would with impunity exploit the weaknesses of the electoral flesh.
If the best that the Republicans can do is to pass a bill that hopes to balance the budget in 10 years, then there is little credibility in attempts to use the debt ceiling as leverage to force Democrats to accept any significant spending limits. If Republicans are serious about restraining the size of government then, even with a divided Congress, they must mark their territory. Mark or be marked.
Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears fortnightly on Sundays. E-mail messages received at: firstname.lastname@example.org
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